Most Expensive Christmas Ever, Consumer Conundrum, Fixing the Credit Crisis, The New Oil Industry, and More!

by Addison Wiggin & Ian Mathias

  • Forget deflation… study finds this Christmas to be most expensive ever
  • Thus consumer’s pull back… personal spending, durable goods orders down again
  • S&P 500 replaces financials with companies that actually make “stuff.”  Say what?
  • Bill Bonner on the credit crisis “fix” for 2009
  • Is America going the way of Japan, or vice versa? Japan announces nearly $1 trillion 2009 budget
  • Byron King on an industry “changing right before our eyes”

If you were romantic fool enough to try to buy your true love all 78 gifts in the “12 days of Christmas”… you’d be shelling out $21,080 this year – an 8% increase over last.

Mostly, you can blame these fatties:

The cost of “seven swans a swimming” leapt 33% to a whopping $5,600 in 2008.

The swan surge, says PNC, the bank responsible for this annual holiday cheer, is a matter of their seasonal availability. Factor out the price of swans and “core” 12 Days prices are up a scant 1.1% from 2007.

The cost of three gifts actually fell: French hens dropped 33%; geese are down 30%; and the coveted “5 golden rings” are 11% cheaper in light of uber-aggressive holiday discounts on luxury goods.

  Alas, retailers are likely to be disappointed this holiday season. The Commerce Department announced this morning that consumers spent less (-0.6%) for the fifth month in a row in November.

Personal income fell 0.2%. As did orders for “durable goods”… they declined 1% in November.

  At the same time, total bankruptcy filings surged 37% in November, year over year. Many consumers not in Chapter 11 are already “missing payments on mortgages, credit cards, and auto loans," says the credit agency Equifax. Thirty six percent of subprime loan holders, for example, are at least 30 days behind on their mortgages for their primary residence. Nearly 6% of all prime borrowers are in the same boat. 

  And U.S. jobless claims rose to a new 26-year high this morning. The number of American’s filing for unemployment for the first time leapt to 586,000 last week, the Labor Department declared today.

You’d have to go back to 1982 to find a weekly jobless report that lousy.

  Such is the state of the economy on the eve of Christmas in the year of our lord 2008.

The world awaits “the bailout…the fix…the plan to revive the world economy by giving it more of what it least needs – more debt,” wrote Bill Bonner this morning while awaiting his daughters for Christmas in rural France.   

“The idea is to make the pain of the correction go away by encouraging people to act as though they had nothing to correct.  They’ve borrowed too much.  And they’ve spent too much.  But the feds aim to make them borrow more – by bringing the cost of borrowing down to an all-time low – and make them spend more… by causing prices to rise. When money loses its value… they’ll be glad to get rid of it.

“It’s a consumer economy, they say; all we’ve got to do is to lure people to consume.  The simpletons.

“Every fool knows it. But every fool also believes that if you mix in a little macro-economic mumbo jumbo that, somehow, central bankers can increase consumption by discouraging saving…and just getting more shells into consumers’ hands. The whole thing is as preposterous as the bubble that went before it.”

The only way to increase wealth is to save and increase production. Perhaps, we’ll learn that lesson in the new year.

  The S&P 500 announced they are about to drop three major financials from the index in exchange for companies that actually make things.

Merril Lynch, Wachovia and National City will all be kicked off the famous index at the end of the year, as each institution has been taken over by a more suitable steward. Replacing them: Scana Corp, and electricity generator. Owens-Illinois, a leading marker of glass containers. And FLIR Systems, which makes thermal imaging goods.

  The broader stock market opened higher this morning. The Dow drifted up about 40 points at the opening bell. On Christmas Eve, with most markets closing early, it’ll take a lot more than lousy spending and employment data to move markets in any significant direction.

Yesterday, the Dow slid 100 points, or about 1%, for its fifth straight loss. Volume was down over 30% from the typical trading day.

  Apparently not wanting to lose their status among “leading” economies in the world, the Japanese government announced a $974 billion budget for the next fiscal year this morning. 

"Unless we take extraordinary measures against this unusual situation," said Japan’s PM, Taro Aso, parroting the conventional wisdom heard daily on the opposite face of the planet, “it will be extremely difficult to get the economy out of the current doldrums.”

Hmmn… haven’t they been trying that recipe for two decades?

  Likewise, Japanese manufacturer sentiment fell to a record low this quarter. The Nipponese score of manufacturing confidence fell four fold, from a score of negative 10 in the third quarter to negative 44.5 today.

In the Japanese version of this survey, a score below 0 means pessimists outnumber the optimists.

  Oil fell again today. Light sweet crude jumped above $40 last week but traders have been pushing back ever since. Today it’s as low as $37.

 “The oil business is changing right before our eyes,” says Byron King. “What’s really going on out there? In short, the decline in oil prices is both a monetary phenomenon and demand-driven issue.

“That is, much of the decline in oil and oil-related stock prices has occurred along with the unwinding and deleveraging of the global economy. Think back over the past decade or so. Cheap credit and expansive money policy helped to drive oil demand upward. Cheap credit also allowed a lot of oil firms to expand operations based on debt. (In the U.S., natural gas driller Chesapeake Energy comes to mind.) Now we have a financial meltdown that has morphed into a worldwide recession. Global economic activity has been contracting. And oil markets have tumbled along with much else. Let’s turn an old expression on its head: ‘A falling tide lowers all boats.’

“How about oil demand? Are people using less oil? Yes, but not in ways that you might think. Demand for motor fuel is down, but just slightly. Times are tough, perhaps, but people still like cheap gasoline. You need to consider that only about half of a barrel of oil ever gets turned into liquid fuels like gasoline, diesel and jet fuel. Of the other half of each barrel, much of the world’s oil goes into chemicals, plastics and construction materials. And with the global economic slowdown, demand from the petrochemicals sector has fallen significantly. So it is the lower worldwide industrial activity that has been key to lowering overall industrial demand.”

  Gold traders seem content with the status quo. Aside from a quick dip yesterday, the spot price has been between $840-845 most of the week

  The dollar is still showing signs of resilience after last week’s crash. The dollar index fought its way back up to a score of 81 yesterday, and has stayed there since.
 “When market participants feel that the waters are ‘safe’,” explains Bill Jenkins, “they will venture away from the dollar into other higher yielding currencies.  This appears to continue as the leading theme of the market, and the news must be interpreted in that light.
“The dollar is not actually strengthening in terms of it’s economic standing.  And with every day that passes, the "powers that be" seem more and more determined to erode the footings and foundation from underneath it.
“The US money garden, which is growing like a weed, will soon be absolutely out of control.  At that point, we will be reaping a bitter harvest, and the dollar will fall into line with its actual value. It’s no secret that the dollar going down is our long-term thesis. But for now, we have to trade the trends.”

We introduced Bill’s Master FX Options Trader this week. If you haven’t had a chance to review it, please take a look here. These currencies plays provide an excellent way to play the trends we follow in the 5. In the past few months, for example, Bill has taken quick gains of 100%, 33% and 23%, on the very ideas you see here daily. Check it out.

  The pawning of sports championship rings has reached a record pace.

“There are some very well-known players who are giving up their rings,” Tim Robbins of told CNBC this week, “even MVP’s that are actually selling their rings. And it’s a real shame because we know they don’t want to have to part with them, but in this kind of economy we’re in right now, that’s the only option they have.  

“A lot of times people sell the rings because of what we call the three D’s. It’s usually drugs, divorce, and/or death. And in recent times we’ve had to add an “E” to it because of the economy… In the last year, since the economy hit us, we’ve been getting a lot more items that we would not normally see.”

Robbins claims, even in these tough times, he can sell a ring from an a-list player for upwards of $40,000.

  Yet, the New York Yankees appear to be unfazed by the credit crisis. The team just spent $423.5 million… for three players. First baseman Mark Teixeira will don the pinstripes for the next eight years, for a measly $180 million.

Add recent signings of CC Sabathia and AJ Burnett, and the Yankees are on track for the most expensive baseball off-season trading in history… recession be damned.

They now control the four biggest contracts in baseball. Good luck, suckers.

  “Your concerns for the U.S. dollar are understandable,” notes a reader. “However, please remember that the Middle East and China, in particular, are drowning in dollars. Much as they want to maintain a competitive position for their exports, destruction of the dollar will have a disastrous effect on their balance sheets.
“In a nutshell, it’s the old story of when you owe your banker $1 000, you have a problem. When you owe 1 million, your banker has the problem. Powerful though the US economy undoubtedly is, the global market will make sure you don’t commit suicide. You wouldn’t anyway, it’s a soft option.”
The 5: Hence the dollar rally during the crisis. But how long are the Chinese, the oil exporting countries, the Japanese… going to be willing to lend the U.S. money and keep the dollar afloat? If the U.S. consumer begins saving in earnest the whole balance gets upset. That’s why Chairman Bernanke has gone on record saying it’s the US duty to spend the world’s savings.

  “Good to see a rare fellow Grateful Dead connoisseur in our chosen financial field,” writes another, “‘Hell in a Bucket’ was a fine song – about 20 years too early for this mess!”

The 5: Indeed. Too much of everything… is just enough.
Merry Christmas,

Addison Wiggin,
The 5 Min. Forecast
P.S. We’re off for the holiday weekend. On Monday we’ll be in L.A. recording the writer commentary for the PBS version of the
I.O.U.S.A. DVD. If you voted yesterday for the audience reader poll on the Critic’s Choice site… well done. We crushed the field. We’re up to 79% of the vote this morning.


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